Overcoming over-indebtedness in Brazil

Wednesday, April 10, 2019

Fair Finance Guide Brazil

The problem

An ‘over-indebted’ household can be defined as one whose existing and foreseeable resources are insufficient to meet its financial commitments without significantly lowering its living standards. This has both social and policy implications, particularly if it implies that the household must reduce its living standard below what is seen as the minimum accepted norm in the given region.[1]

In Brazil, more than 61 million individuals are indebted today. Half of them are over-indebted, a situation which causes major financial and physical stress in their lives.[2] A lack of transparency and financial guidance about credit, as well as misleading advertising of loan products causes many people to take out new loans to pay off arrears. This leads to snowballing interest rates without any prospect of the client negotiating a settlement with financial institutions, trapping them in an ever-deepening spiral of debt and poverty.

Influencing activities

For over four years, the Fair Finance Guide in Brazil (FFG Brazil) has been focusing on over-indebtedness, working alongside IDEC (Brazilian Institute of Consumers Defence), the coalition lead, which has studied the issue in Brazil for over a decade. By organizing debates, developing case studies, producing a documentary, creating campaigns and an electoral platform as well as advocating with the Central Bank and National Congress, FFG Brazil has become a key stakeholder and a respected voice in the national debate on over-indebtedness. Both IDEC and FFG Brazil also provide free information on their websites to help consumers avoid or overcome over-indebtedness or default.

This involvement and recognition of the Brazilian coalition as a key stakeholder has improved the quality of the debate on over-indebtedness in the country and there has been a significant increase in the number of people seeking advice and guidance on the IDEC and FFG Brazil websites.

Change in social and public actors

Despite the scale and impact of over-indebtedness, attention has only been properly paid to the issue since IDEC and FFG Brazil have been actively campaigning on it. Consequently, the debates have become broader and more grounded in data, insights and evidence, with expertise increasing among stakeholders. For example, within universities there has been a recent proliferation of studies about indebtedness and the issue has gained new advocates, including among some eminent academics.

Politicians and the media have also changed their attitude and approach to the subject: over-indebtedness has been gaining much more media attention than was previously the case, appearing more regularly in TV programmes and newspaper articles; it also featured heavily in the presidential campaigns from August–November 2018. Almost all presidential candidates’ debates mentioned the topic, helping to establish over-indebtedness as a highly relevant national debate.

Over-indebtness becoming a widely debated issues helped enter the policy-making realm. In 2017, the Senate unanimously approved Law Project No. 3515 (over-indebtedness Bill PL3515/15), a law intended to ensure that financial institutions have suitable policies to avoid over-indebtedness as well as stricter rules on the content of contracts between financial institutions and consumers.[3]

Change in financial institutions

To date only one financial institution has started to take action in response to the nationwide problem. Brazil’s fifth largest bank, Santander Brazil, started campaigning about the rational use of credit and is now providing more explicit information about its credit offers. FFG Brazil is maintaining a close relationship with the most important banks as well as the Central Bank, and is continuously pushing for improvements and binding commitments.

Impact on the ground

The situation of over-indebtedness in Brazil is changing, slowly but surely. The above-mentioned efforts and achievements have made a crucial contribution to ameliorating the situation and pointing to a better future for millions of Brazilians. To illustrate how the work of FFG Brazil in alliance with IDEC and other CSOs has contributed to overcoming the situation of indebtedness for ordinary Brazilians, the coalition followed the stories of two over-indebted men whose lives have changed as a result.

Marcelo de Braz Coutinho, a retired photography director from São Paulo was mired in debts with Itaú Bank, where for 20 years he had bank accounts with his wife. At the end of 2016, his loans totalled 45,000 Brazilian Reals (R$) ($11,530). Because he was unable to pay, the bank sent his name to Serasa (Brazilian Credit Bureau), which led to Coutinho and his wife receiving daily calls and threats from various debt-collection companies. From time to time, Coutinho reported the harassment and tried to negotiate the debt, but without success. In July 2017, Itaú Bank withdrew – without any prior notice – R$4,000 ($1,024) from his account. For Coutinho, this was the last straw.

Frustrated by the injustice, he decided to contact IDEC for assistance. In November 2017, Coutinho delivered several documents to IDEC (e.g. his bank contract, e-mails exchanged with the manager etc.) to be analysed. In February 2018, he received the results, along with guidance on what to do – including making a proposal to the bank to settle his debt. This advice enabled Coutinho to present a compelling claim to a Brazilian consumer protection agency, consumer.gov.br. Three days later, he was informed that his proposal to pay R$3,000 to close the debt had been accepted by the bank. Relieved, Coutinho made the payment and was finally able to clear his name.

He said: ‘IDEC and FFG Brazil helped me organize my defence. I already got the first victory; now I’m waiting for the hearing of the Public Defender’s Office.’

Rubens Adorno, a retired University of São Paulo professor, came to FFG and IDEC for advice on his severe debt situation after seeing the studies conducted by FFG Brazil on over-indebtedness and the financial system. His story perfectly illustrated how banks’ policies were leading the population to widespread over-